* Santos agrees to buy 14.3% stake in P'nyang
* Santos shares rise to two-week high
* Deal comes amid political turmoil in PNG (Adds political background)
BANGALORE/SYDNEY, May 16 (Reuters) - ExxonMobil has agreed to sell down its holding in the P'nyang gas field in Papua New Guinea to Santos Ltd, giving the Australian company a stake in the field that will help feed an expansion of Exxon's PNG LNG project.
Santos will buy a 14.3% stake from existing partners in P'nyang, including Oil Search Ltd and JX Nippon, but mostly from ExxonMobil, for a total of $187 million, Santos said in a statement on Thursday.
The deal helps smooth the way for the planned expansion of PNG LNG, roughly aligning Santos' 13.5% stake in the LNG project and the new gas field. "The arrangements we announce today mark an important step towards the proposed expansion at the PNG LNG plant via a 2.7 metric tonnes per annum third LNG train fed by existing Project resources and P'nyang," said Santos' Chief Executive Kevin Gallagher.
Oil Search said it would receive roughly $21.6 million for relinquishing a 1.65% stake in P'nyang to Santos, bringing its holding to 36.86%. Exxon will hold a similar stake in the venture after the deal, having relinquished about 12.1% of its stake to Santos.
Santos' shares rose as much as 2% to a two-week high after the announcement, in a slightly stronger broader market.
The P'nyang partners are waiting to seal an agreement with the government for development of the field, but the signing has been delayed amid political ructions in Papua New Guinea.
The government of Prime Minister Peter O'Neill faces a possible vote of no-confidence later this month.
Adding to the pressure a watchdog - in findings O'Neill disputes - said the PM acted improperly when arranging for the South Pacific nation to borrow A$1.2 billion ($830 million) from Swiss bank UBS in 2014.
The Ombudsman Commission said in a December report leaked this week that O'Neill failed to follow correct legal procedures and bypassed parliament in deciding to borrow the money, used to buy shares in oil and gas producer Oil Search Ltd.
"The leak of the document is clearly political by some in the opposition playing a very dirty game in a desperate attempt to gain support for a change of government," O'Neill said in a press release late on Wednesday.
PNG's opposition is maneuvering to call a vote of no confidence after a string of high-profile defections from O'Neill's government, including finance minister James Marape.
Marape told Papua New Guinea's National newspaper on Wednesday that he quit because April's Papua LNG gas agreement with France's Total and its partners gave too much ground to the majors. (Reporting by Ambar Warrick in Bengaluru and Tom Westbrook in Sydney; editing by Richard Pullin)